A Backdoor Into Asia's Emerging Markets

With the analysts predicting that emerging markets will account for the majority of future economic growth and gross domestic product (GDP) power, having exposure to the faster moving nations is essential. Their expanding wealth profiles and population demographics help cement the investment thesis. Funds like the SPDR S&P Emerging Markets (ARCA:GMM) have become popular portfolio additions, as investors have sought to capitalize on the trends. However, not all roads into the emerging world are as obvious as buying an emerging market fund. There may be another approach to gain access to these faster markets at unbelievable cheap levels. (To know more about emerging market, read: What Is An Emerging Market Economy?)

The Land of the Emerging SunWhen investor's think about high growth opportunities, Japan never makes the list. Overall, the nation has been viewed, by many investors, as one of the most unfavorable markets for at least 20 years, ever since the 1980s crash and resulting crippling deflation. However, that impression may be changing. Japan is quickly transforming itself from a leading exporter to the developed world, to Asia's emerging go-to supplier.

About 56% of Japanese exports head into China, while another 16% go to other emerging markets in Asia. The key is Japan's dominance across a variety of high tech sectors, outside of consumer electronics. Ironically, the nation's nuclear reactor designs are gaining traction throughout the rest of Asia. A partnership between Japanese reactor designers and the nation's government, has begun expanding marketing of multibillion dollar projects towards energy-hungry countries like Indonesia. Recent fruits of this effort include a $13 billion project to build two reactors in southern Vietnam. Japan is also seeing big export gains across a mixture of infrastructure and pollution remediation equipment. The nation is a leader in clean energy, and advanced transportation systems like bullet trains. As emerging Asia continues to build out its infrastructure, Japan will be a major beneficiary of this construction. In addition, Japan is seeing increased levels of "shopping tourism." Last year, travel restrictions between China and Japan were lifted, and Chinese middle-class residents have been flocking to Japan's shores to gain access to luxury goods and higher quality products.

Playing Japan's New Emerged DominanceFor investors, Japan's newly minted status as Asia's emerging go-to supplier could be the catalyst it needs to finally break out of its doldrums. Adding broad plays like theiShares MSCI Japan Index (ARCA:EWJ) or WisdomTree Japan Small-Cap Dividend (ARCA:DFJ) make ideal ways to play the entire Japanese story. However, some of the best plays for the nation could be in individual stocks.

With the World Nuclear Association predicting that the number of nuclear power plants will more than double in the next 15 years, reactor designers Hitachi (NYSE: HIT) and Toshiba Corp. (OTCBB:TOSBF) will be major winners. Even if that doesn't pan out, both firms have a variety of infrastructure, consumer electronics and industrial products that the emerging world is craving. In addition, the firms are still cheap, trading for forward P/E's under 10.

While Caterpillar (NYSE: CAT) often gets the nod from investors as the top construction play, Japan's Kubota (NYSE:KUB) and Komatsu (OTCBB:KMTUY) could be better buys. Both offer heavy machinery for construction, farming and industrial uses. Kubota's price-to-book ratio is around 6, and Komatsu was the first heavy machinery firm to offer hybrid versions of a few of its excavators.

The Bottom LineJapan's recent expansion as a major exporter to Asia's emerging markets could be its saving grace. For investors, this could be the time to add the nation to a portfolio. The previous firms, along with sogo shosha's like Sumitomo Corporation (OTCBB:SSUMY), make ideal selections. (For additional reading, check out: The Risks Of Investing In Emerging Markets.)